Our World is changing, and we must change with it.

Prof. Bernard Peter Agulhas CA(SA)

We cannot ignore the stark changes in the world around us. While change is inevitable, what has caught us unawares is the pace of change and that even the pace is accelerating at an ever-increasing rate.

The most important competency in professions of the future will be adaptability. Teaching and training will hardly be able to keep up with the rate of change and the best that can be done to ensure that qualifications remain relevant is to develop the necessary skills to change with the world around us.

While most professions will be affected by the above, few have and will be impacted as much as the auditing profession. Not only must auditors implement changes in their own firms, but also be prepared to understand the changes occurring in their client base – changes which will be impacted by their size, the industry in which they operate, the legislative environment, changing customer needs and not in the least, technology.

As if keeping up with these expected (sometimes unexpected) changes is not enough, further changes over which we have little control continue to take place in our biophysical environment and society. Equality, embracing differences and respecting others is no longer optional, and entities which do not respond to this New World do so at the risk of their demise – at least, that has been the word on the street thus far.

What is certain is that our world is changing, and we must change with it

Another change which was believed to leave entities with no alternative but to respond to public expectations was climate change. Suddenly companies must take responsibility for what they put into and take out of our threatened environment, and authorities realised that they, too, have a responsibility to hold others accountable for taking the necessary actions to protect the changing environment. Agendas of World Economic Summits have been dominated by environmental topics and countries signing up to various treaties to demonstrate commitment to changing their behaviours to ‘do the right thing’.

Managing the Change

Global standard-setters have been slavishly and diligently developing standards to guide countries to report on Environmental, Social and Governance (ESG) matters, notably the International Sustainability Standards Board (ISSB) which issued its first standards in 2023 with an effective date of 1 January 2024:

S1: General Requirements for Disclosure of Sustainability-Related Information

S2: Climate-Related Disclosures

The lofty objectives of these standards were to disclose information about sustainabilityrelated risks and opportunities that would be useful to users in changing their decision-making about the resources of the entity, the ability of the entity to generate cashflows linked to stakeholders, society, the economy and the natural environment throughout the value chain, and how to disclose this information.

Irrespective of what has changed, achieving these objectives still requires preparers to go back to the basic principles and concepts of reporting, including the following:

• Information must be relevant and faithfully represent what it purports to represent.

• Information must be comparable verifiable, timely and understandable.

• Users must understand the connectivity between disclosures on risk, strategy and governance, as well as between sustainability-related disclosures and other financial information.

Before we return to these lofty objectives and basic reporting principles, it is important also to understand that there is a distinction between the terms ‘ESG’ and ‘Sustainability’, which is well described in Nedbank’s 2022 Group Society Report as follows:

Adherence to ESG standards and frameworks is typically delivered through company reporting. This is a valuable means of assessing the resilience of an organisation and the extent of its sincere commitment to ESG imperatives, offering a framework to evaluate companies’ extra–financial performance against peers.

In contrast, sustainability is explicitly strategic and forwardfocused, considering the optimisation of value across the six capitals (natural, social and relational, financial, manufactured and intellectual) and the balancing of these in the short, medium and long-term).

The difference is therefore centred around ‘ticking the boxes’ for reporting purposes and a long-term commitment to add sustainable value.

More changes, more questions

More changes raise more questions. Do companies’ financial statements and annual reports faithfully represent sustainabilityrelated information?

To faithfully represent information, financial and non-financial, disclosures must be balanced and include both positive and negative impacts the company have on its environment, society and in applying its governance practices.

While some financial statements and annual reports provide glowing renditions of their positive impacts (and often get awarded for these renditions), it is not often that one reads about what companies continue to take from the environment and continue to contribute to the issues which cause climate change, its bad practices regarding how it responds to social issues such as equality (despite having the best policies which should drive the desired behaviour) or any bad governance practices (e.g. not fully embracing the need for independence of members of its governance structures).

Surely, while most companies will strive to achieve the objectives of sustainability–related reporting, none of them can be perfect. How is assurance provided on the accuracy of the disclosures?

Granted, it is not that easy to measure some of the elements in sustainability-related reporting, although the development of metrics will go a long way in ensuring comparability and consistency, amongst others. Kudos to the ISSB for timeously developing some relevant reporting frameworks, which is a requirement if assurance is to be provided on this information.

And while auditing and assurance standard-setters are producing

guidance on how to audit these disclosures, a further question remains as to whether it is those who are skilled in auditing or those who are skilled in ESG matters who will be able to provide the necessary confidence in the reported information. And let us not forget the recent reputational damage caused by inappropriate opinions provided which caused investors and others to lose billions (on financial information which is expected to be far less prone to manipulation and misrepresentation and supposedly much easier to verify).

If society were required to trust and rely on opinions on financial information, how much more would they demand reliable opinions on information which impacts their (and future generations) welfare, safety and continued existence?

Who will make companies disclose sustainability-related information?

Jurisdictions retain the prerogative to adopt financial reporting and auditing standards. However, for these standards to be enforceable, they must have legal backing.

One would expect that holding role players to account for events which could inform our continued existence would be the number 1 priority for the State.

It must deal with matters of policy to ensure transparency, accountability and sound financial controls in the management of public finances, including financial stability to protect the economy and the people from major shocks to the financial establishment and building resilience through effectively managing all potential risks – not only those of a financial nature.

The Climate Change Bill was passed by the South African National Assembly on 24 October 2023, which recognises that ‘everyone has the constitutional right to an environment that is not harmful to their health and wellbeing, and to have the environment protected for the benefit of present and future generations through reasonable legislative and other matters that secure ecologically sustainable development and the use of natural resources while promoting justifiable economic and social development.’

It further recognises that ‘climate change policy needs to be implemented in the context of sustainable development objectives and the achievement of national development goals’, as well as the need to ‘develop a legal and institutional framework for the implementation of the Republic’s national climate change response.’

This would mean that regulators will have the means to enforce compliance with relevant standards and implementation of regulations to honour those lofty international commitments and obligations signed up for at the various world economic summits. Now the Bill just needs to be tabled at the various parliamentary structures which will lead to its ultimate assent.

The tide is turning...

In the meantime, while questions abound, an article by Chip Cutter and Emily Glazer appeared in the 10 January 2024 edition of the Wall Street Journal, which further questions the reference to ‘ESG’ in reports given investor backlash, political pressure and legal consequences as well as putting too much emphasis on disclosure requirements (refer to the Nedbank distinction above and the famous Black Rock asset management giant which was criticised for its stance on ‘ESG’ reporting). The article further quotes the CEO of Brewster’s preference to refer to ‘responsible business’ instead of ESG. The Americans might have a point here.

It may sound as if we are merely playing around with words, but as we know, words have consequences. The public must be able to trust what is reported to them, more so on matters which impact their, and future generations’ sustainable existence. In terms of ESG parlance, this is only fair and responsible.

Nobody expects answers to every question, and it must be acknowledged that the increasing pace of change will only cause a greater abyss between the need for a response and a fitting response. And it will do us well to remember that while disclosure and transparency will go a long way in building trust and confidence in the legitimacy of company reports, they hold empty promises if they veer from faithfully representing the truth and what a company really does in pursuing sustainability. This cannot change.

This is truly a case of ‘actions speaking louder than words’ and we can only strive to mirror Mark Twain’s comment on Hamilton W. Mabie as far back as 1901, which requires us to act on our intentions: ‘A man is always better than his printed opinions.’